Lockheed to Acquire Loral In a Deal Worth $10 Billion

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In a startling move that accelerates the consolidation of military contractors and is likely to lead to more layoffs, the Lockheed Martin Corporation announced today that it planned to acquire most of the Loral Corporation in a complex deal that is valued at more than $10 billion.

The announcement came as a surprise, in large part because Lockheed Martin was itself a result of a merger, in 1994, and it is still struggling to digest that combination. But the announcement underscored pressure from the markets -- and from the Pentagon -- for military contractors to grow larger and more efficient through consolidation to survive at a time of declining military procurement budgets.

Just last week the Northrop Grumman Corporation said it was acquiring the military electronics businesses of the Westinghouse Electric Corporation for the equivalent of $3.6 billion. Loral had been a losing bidder in that deal.

Analysts also said they expected the merger to result in several thousand layoffs, at least some of them in the New York area, where Loral, a big electronics company, has its headquarters and the two companies employ about 10,000 people.

Loral's shareholders will benefit, because they will receive the equivalent of about $45.50 per share for each share they own. Loral's stock jumped $8.25 today, to $44.50. Lockheed Martin stock rose $2.875, to $80.25.

The deal will create two new entities that will be huge competitors in their businesses. Lockheed Martin will absorb the highly regarded military electronics business of Loral. It will emerge as by far the country's largest maker of military hardware, with annual revenues of about $30 billion.

The company will produce everything from the F-16 and F-22 jet fighters to missiles, commercial and military rocket launchers and electronic defense systems for the Navy.

In addition, the deal will result in the creation of a new company, to be called the Loral Space and Communications Corporation. This company will be involved in the growing civilian business of satellite telecommunications for individuals and businesses, particularly in Southeast Asia and other regions.

Up until now, this business has been regarded as a promising but untested new way to expand the telecommunications market. Today's announcement, and especially the fact that Loral's respected chairman, Bernard L. Schwartz, will be leading the new company, will bring new focus on this emerging industry, analysts said. In fact, Mr. Schwartz indicated that the company was already preparing some acquisitions to increase its presence in the business.

Under the terms of the transaction, shareholders in Loral will receive $38 in cash for each share, plus one share in the new company. Lockheed Martin will then purchase a 20 percent stake in Loral Space and Communications for $344 million. That gives the new shares an estimated value of $7.50 each, which makes the transaction worth roughly $45.50 per share for Loral shareholders.

Lockheed Martin will thus pay roughly $7 billion in cash for Loral's shares and will assume an additional $2.1 billion of Loral's debt. The new space company will have a value of about $1 billion, which brings the total value of the acquisition and spinoff to about $10.1 billion.

The deal is also interesting for what it does for Mr. Schwartz, who recently turned 70. Analysts said they expected this wealthy entrepreneur, who built Loral over the last two decades from a modest company to a behemoth in its business, to stay active in the new space business.

"The nice thing about this is that it's not just a finale," said Lior Bregman, an analyst at Oppenheimer & Company. "The company has a new start. Schwartz is not just taking his money and going to Florida. It's very exciting."

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Analysts also said the combination would force other military contractors to hasten any planned mergers and to make the remaining American companies even more competitive in selling military hardware overseas.

"Bernard Schwartz and Norm Augustine have been the two visionaries in this industry, and that makes this an important transaction," said Jon B. Kutler, the president of Quarterdeck Investment Partners, an investment bank that specializes in the military industry. Norman R. Augustine, the former Under Secretary of the Army in the Defense Department, is now the president and chief executive of Lockheed Martin.

One clear benefit of the acquisition is that it will produce a fortune for Mr. Schwartz, who earned $6.24 million in compensation last year. He owns stock that is now worth about $160 million.

In a press conference today, the heads of the companies were at pains to stress that the number of layoffs would be relatively modest and that, over time, the employment rolls of the combined company, more than 200,000, would grow. But they did acknowledge that some layoffs were inevitable.

Mr. Bregman estimated that perhaps 4 percent of the combined staff of the companies would be cut. That would amount to about 8,000 people.

"Ours is an industry that has to change," said Mr. Augustine, who added that the business of military contracting was going through "Darwinian times."

While there is likely to be a review by the Justice Department of whether the creation of such a huge company would be anti-competitive, analysts said they did not expect the Government to block the deal, which was put together in secret over four months. The top executives have already discussed the transaction with the Pentagon.

The new Lockheed Martin will receive about $17 billion a year of its $30 billion in revenues from defense electronics. About 60 percent of its revenues will come from military contracts, and the remainder from civilian businesses.

The deal will also make it an even more formidable competitor to foreign military contractors, particularly the big European companies. Mr. Augustine said that Lockheed Martin currently received about 17 percent of its revenues from overseas, and that that figure was likely to grow in the future.

A number of factors brought the two sides together, among them the pressure by the Pentagon to consolidate as well as the low interest rates available because of the weak economy.

Lockheed Martin will borrow about $10 billion to complete the transaction, and its executives stressed that taking on so much debt -- it will have a total of $12.5 billion after the deal -- was made far easier by the fact that interest rates are at their lowest levels in years.

A version of this article appears in print on January 9, 1996, on Page 1001047 of the National edition with the headline: Lockheed to Acquire Loral In a Deal Worth $10 Billion. Order Reprints|Today's Paper|Subscribe